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Friday, 10 October 2014

Fund Management Performance (20 Years)

This research note is a preliminary
study of listed asset management companies (Amcos). The ultimate aim is a
process of selection for “FPM Amco Long/Short
Recommendations”. An opportunity to get direct equity exposure to asset management
companies (Amcos) during this general market correction in many global equity
capital markets, particularly with S+P 500 at 6-month lows is the market timing
under consideration. Also, we discuss the costs and benefits of investing in
select FPM Amco stocks.

We believe record levels for
equity benchmarks such as the S+P 500
closing above 2000 for the first time ever in August, augurs continued
economic stability which was initiated by concerted global government stimulus.
FPM analysis indicate ‘animal spirits’ will only be slowly painstakingly and enduringly
restored. Whether that is a lull in
perception about stagnant tepid global economies or an opportunity to
exploit the trading volatility, we advise the real-money investors in deciding
overall allocation strategies.

FPM’s repeated macro economic view
is that we are in a “pause for breath”
amid fundamental structural changes in social-ecological political and other
spheres (listed in “FPM Risk Assessment Matrix” and also in our “Accumulating
Risk Trends – ARTs”); and ultimately in financial landscape, not just regionally
but also globally.

The State-driven economic policy and
resultant macro fundamentals which have flummoxed many institutional investors
(no less the famed and topical Bill Gross of Pimco Advisors!) in their
prediction and interpretation ever since the “game-changer financial crisis”. Indicatively we may expect to know
what the next seven years are likely to herald from the “easing off” of credit-injection
reflation policy; excepting the chaos scenario outcome from extended and unprecedented
national debt and global debt accumulation! This is the key to macro economic
scenario analysis today. In regards financial capital, as FPM
have propounded since July 2009, that we are in an era of equity markets characterised by side-ways trending benchmarks
with bouts of volatility and a tentative secular uptrend. Given geopolitical
risk considerations, policy manipulated markets, and other downside risks (See
FPM Risk Assessment Matrix), FPM believe there is not enough market impetus or
volume to send us off a precipice to a lower low in the capital markets
benchmark, anytime soon, despite increased uncertainty in high volatility
periods.

Before we pick the Amcos for the FPM Amco Portfolio we
believe the general partner exposure is as valid as an investment in their
underlying limited partner (LP) funds. Selecting appropriate sectors to
allocate capital for speculative or investment purposes is shown in empirical
research to be paramount to portfolio performance. So we have produced a select
ETF constituent proxy of various asset
class performances.

Amcos As Investment Fund Proxies

For all the greater transparency
mandated by SEC regulation (such as expanded Form ADV and the exhaustive Form
PF); yet NAV i.e. price history, particularly of alternative investment funds
(AIFs) such as hedge funds and private
equity funds, remain opaque. As might be expected for essentially still an
over-the-counter OTC product structure, as compared with the long established
staple of 401(k) pensions plans, the humble mutual fund. Aside of AIFs’ price-discovery
issues, mutual fund prices do have greater price visibility and accessed via
their ticker / monikers from public websites such as Yahoo Finance and Nasdaq.

For FPM’s 3-fold enterprise manifestation[1]
agenda, we decided to take a proxy for the gamut of investment funds through
their listed management companies – for which there is access to financial accounts
and statements, as well as database of price history for research analysis. While AMCOs maybe categorised as either
predominantly applying “passive” or “active” management for the sake of broad distinguished
identity. FPM enunciates the “convergence’ force as powerful. Then into further
meaningful assessment of whether the management company is considered primarily
as “traditional long-only”, “alternative investments” and / or “index trackers”

1) Long Term (Established Amco) - Hold / Buy

For this ‘top-down’ recommendation analysisof the listed AMCOs for buy-and-hold portfolios we selected those
with pre-2000 vintage (i.e. those managers publically trading before and after Asian
Financial Crisis of 1997-98 and TMT-Bubble of 2000).

Fund Management
Performance (20 Years or Inception History)

Compound Return %

Annual Return %

Eaton Vance Corp. (EV) (Oct 1994)

3094.8%

18.9%

Aberdeen Asset Management PLC (ADN.L)
(Oct 1994)

2969.1%

18.7%

T. Rowe Price Group, Inc. (TROW) (Oct
1994)

2443.9%

17.6%

Franklin Resources, Inc. (BEN) (Oct
1994)

1430.2%

14.6%

Legg Mason, Inc. (LM) (Oct 1994)

1119.4%

13.3%

2) Long Term (Established Amco) – Watch List

AllianceBernstein Holding L.P. (AB)
(Oct 1994)

787.2%

11.5%

Invesco Ltd. (IVZ) (Aug 1995)

753.4%

11.8%

BlackRock Inc. (BLK)

See Full Research

See Full
Research

3) Specialist Strategies (Noveau Aimco) – Hold / Buy

Fund Management
Performance (20 Years or Inception)

Compound Return %

Annual
Return %

Virtus Investment Partners, Inc.
(VRTS) (Jan 2009)

2694.9%

78.5%

Affiliated Managers Group, Inc. (AMG)
(Nov 1997)

1072.2%

15.7%

Gamco Investors Inc (GBL) (Feb 1999)

534.8%

12.5%

4) Established and Noveau Amco - Watch / Sell

For the ‘all-in’ SELL list we
selected only those poor performing managers with over 5-years’ listed-price
record. Again here we stress that this preliminary work is only intended as a top-down recommendation. Noticeably and
unspectacularly the resulting list includes those managers specialised as alternative investment management companies
- “AIMCOs”. The reasonable
explanation for most of these alternative managers’ underperformance perhaps stems
from the partial public listing e.g. Blackstone Group have only a 10% public float.
This is in “FPM Alt Kind - M&A” terms due to distribution rights priority
of founding managing partners over shareholder distributions on operating
profits.

Fund Management
Performance (20 Years or Inception)

Compound Return %

Annual Return %

Fortress Investment Group LLC (FIG)
(Feb 2007)

-73.4%

-15.9%

Man Group plc (EMG.L) (Oct 1994)

-77.2%

-7.1%

Och-Ziff Capital Management Group
(OZM) (Nov 2007)

-29.0%

-4.8%

Calamos Asset Management (CLMS) (Oct
2004)

-24.5%

-2.8%

Blackstone Group, L.P. (The) (BX) (Jun
2007)

55.9%

6.2%

A prudent investor may suggest
theses me-too newcomer ‘alternative’ listings are mainly a strategic phase
acting mainly as an opportunity for the founders to cash-in a stake in their
company via the initial public offering - IPO (and often a subsequent phase
after a private stake sale for price
discovery and market valuation purposes).

So the eventual or initial market
price trading history having little reflection to overall book value or
performance expectations of the firm. In fact, Blackstone Alternative Asset Management (BAAM), the division of the
Blackstone Group (BX) which
manufacture hedge fund investments confirm in their February 2014 presentation
that “Valuations for hedge fund GPs do
not reflect long‐term
value”. This can be interpreted in two-ways: 1) no long-term value in
investing in a hedge fund Aimco or 2) Markets’s valuation of Aimcos doesn’t
reflect future expectations.

For Further Qualitative And Bottom-up

Analysis:

Conclusion of our quant based
preliminary ‘top-down’ recommendation of a select asset management companies
and their fortunes for an investor in them.

FPM brand of fund analysis shows
that an investment in traditional long-only asset management companies (Eaton Vance Corp. et al.) outperform
those of relatively newly listed ‘alternative
vintage’ of Och-Ziff Capital Management Group (publically est. 2007) and their
brethren over the long term. Listed alternative investment management companies
(“Aimcos”) are the relatively poor performing subset in the asset management
industry. Och Ziff (OZM) is down 29% in dividend and split adjusted price terms
from its public inception. While Eaton Vance (EV) is annualising comparable
returns of 19% over the past 20 years.

“Public Inception” of an Amco is of
grave strategic concern when essentially boutique businesses seek that
trepidation of growth-obsessed to institutionalise. These concerns in
considered the FPM’s Product Convergence Story (a.k.a. “Product
Convergence or Incestuous Orgy in Alternatives”). When the premise of
something changes one should change their opinion about it in equal measure!

Since not all breeds are made
equal, of the Aimcos we noticed from our preliminary ‘top down’ survey of their
quantitative metrics, we researched anew Virtus
Investment Partners, Inc. (VRTS). This new Amco, which only publically
listed in January 2009, had unbelievable (‘Green for Go’ Highlighted) total returns with dividend re-investment
of 2,695% or 78.5%
annualised. This naturally seemed bizarre when compared to other definitive
Aimcos in that table above returning 15.7% and 12.5%, such as Affiliated Managers Group - listed Nov
1997, and “Gabelli”.

Virtus Investment Partners, yet
without the veritable ‘VIP’ ticker! is new on FPM coverage radar as a vivid
example of how relevant bottom-up understanding complements top-down quant
estimation. Virtus was founded in 1988, perhaps a phoenix rising out of the Black
Monday Market Crash of 1987, but like Affiliated
Managers Group, they maybe considered ‘Amco’ management company not unlike
a multi-manager but with general partner relationships i.e. a platform for other
affiliated managers under an umbrella label. For our full research report we
reveal if Virtus are a business development company (BDC) category; like the
coverage we initiated on Ares Management L.P. (ARES) of Ares Capital
Corporation (ARCC)…

“We were concerned that Blackstone, now an AIM category behemoth and
industry bellwether, is not adhering to its founding reputation risk
principles. A seemingly ardent principle to the partnership co-founder Stephen
A. Schwarzman, from the days of his office-next-door association with Dennis
Levine; a former Lehman Brother’s colleague who was central to the mid-1980’s
insider trading crackdown. “Blackstone is sensitive to reputation”, was recited
as a holy mantra to the author of this investigative research during a due
diligence meeting in 2007 with the then head of asset allocation.” (Source:
FPM’s No
Smoke Without Fire! 22 April 2013)

Also, we were less than impressed
with Blackstone’s total returns figures, up 55.9% since public inception in June
2007 or only 6.2% annually. Despite Blackstone’s division Hedge Fund Solutions or
BAAM (mentioned above), reporting in their February presentation in Florida of 22%
CAGR in economic income; we believe the predominantly private equity advisory business
is reeling from low transactional flow, perhaps hampered by easy money preventing
corporations from needing their buyout contravention…